1. Slides by Seth Carnahan, BADM 545, Fall 2009
“Real options in equity partnerships” Tim Folta and Kent Miller 2002 SMJ
Slides by Seth Carnahan, BADM 545, Fall 2009

2. Overview
Research question: What influences the decision to purchase additional equity in partner firms in research- intensive industries?
Key results:
Greater uncertainty motivates firms to purchase additional equity when options are shared
The effect of partner firm valuation on the decision to acquire additional equity is stronger when uncertainty is low.

3. Motivation Delaying commitment is likely optimal for financial options
However, for real options, delay might cause the firm to
Forgo cash flows
Miss opportunities to learn
Be pre-empted by rivals

4. Data and model Universe Two exponential hazard models Data
285 minority equity collaborations between firms outside biotech and US biotech firms initiated between 1978 and 1999
Two exponential hazard models
Model 1 DV: Does the partner acquire a majority stake in the biotech firm?
Model 2 DV: Does the partner acquire an additional stake in the biotech firm?
Data
Most biotech firms are private, so many variables must be imputed using data from public biotech firms

5. Results Hypothesis IV Support Majority stake Addnl Stake 1
Hypothesis IV
Support
Partner buyouts are more likely when . . .
Majority stake
Addnl Stake 1
Partner valuation is higher
1) Subfield specific stock index 2) # public offerings in partner's subfield 2
Uncertainty is lower
Variance of specific stock index 3
Uncertainty is low and partner valuation is high
Interaction 4
The option is more proprietary
log(# of other equity investors) 5
The option is less proprietary and uncertainty is high 6
Growth options are more unique
# competitors for partner firm

6. Hypothesis 3
-As uncertainty decreases, firms are more likely to purchase additional stakes in existing partners

7. Hypothesis 5
-When uncertainty is high, more equity partners increases the likelihood that an existing partner will purchase an additional equity stake

8. Conclusion
The paper asks extremely interesting questions, but data limitations prevent a complete analysis
DV in the hypotheses does not map onto paper’s primary analysis
Use of sector-specific indices is best solution available, but abstracts away from the theoretical discussion of firm relationships